As the shift toward adopting a fee-based compensation model gains momentum throughout the investment industry, investment advisors are relying on their firms for crucial support in both making the transition and operating within that model, according to the results of this year’s Brokerage Report Card.
Although some firms have long been providing comprehensive support in this area, other firms are catching up – and this strategy is becoming ever more critical as regulatory changes and other factors accelerate the push toward fee-based compensation. In particular, new disclosure rules under the second phase of the client relationship model (CRM2) and recent debates about banning embedded commissions have put advisor compensation in the spotlight.
“[Fee-based compensation] is the way we’re all going, especially given CRM2,” says an advisor in Atlantic Canada with Toronto-based CIBC Wood Gundy.
As a result of this trend, advisors surveyed for Investment Executive’s Brokerage Report Card were asked to rate their “firm’s support for advisors operating within a fee-based model” for the first time. Advisors gave their firms an overall average performance rating of 8.2 in this category and an overall average importance rating of 8.8.
Making the transition to a fee-based business from commissions is a major endeavour that requires not only new processes and technology, but also a strategy for communicating the switch to clients. In some cases, even though their firms have the technological support in place, advisors said, they need more help in putting together the communication piece of the puzzle.
“They need to coach us more on new ways to explain [the switch to fees] and sell it to clients,” says an advisor in Ontario with Toronto-based ScotiaMcLeod Inc.
The firms that received the highest ratings in this category have developed both the technological capabilities and the support teams necessary to help advisors transition to and operate within a fee-based model.
Toronto-based RBC Dominion Securities Inc. (DS) has invested significantly in this support, which has earned the firm the highest rating in the category, at 9.1.
“They definitely have put a lot of money toward back-office and computer systems and making sure there’s a whole team to explain how that works,” says an DS advisor in Ontario.
DS began investing in fee-based capabilities many years ago, based on the belief that this model creates closer alignment between the interests of advisors and their clients, says Mike Scott, the firm’s managing director: “We’ve been very focused on it. It puts you on the same side of the table as the client and it provides complete transparency, which is really important.”
Other firms have been slower to embrace fee-based compensation. Mississauga, Ont.-based Edward Jones, for example, launched its fee-based investment program, called Guided Portfolios, in 2013. That program enables advisors to provide clients with a customized investment portfolio, including a review at least twice a year, with fees charged based on the amount of assets invested.
Many Edward Jones advisors said they’re pleased that the firm has begun investing in this strategy. “We’re new to this, but we’re doing well,” says an advisor in Ontario. “It’s a pretty good system.”
Other Edward Jones advisors said they’re not convinced that fee-based compensation is appropriate for their business. “The industry is pushing for this transition, but I struggle with it. I’m not sure if it’s a priority,” says an advisor in British Columbia.
Edward Jones leaves the decision to utilize the fee-based program entirely up to advisors, says Janesse McPhillips, principal, managed investments, Canada, and they should determine the best approach on a client-by-client basis.
“We don’t ever recommend or encourage advisors to switch their practices to fee-based holistically,” she says. “There is a subset of advisors who really prefer to use the transaction environment, and that’s something we’re very comfortable with.”
Advisors with certain firms said there’s much more pressure to adopt fee-based compensation, but they don’t feel they’re getting the support necessary to do so.
“They’re pushing us to make the transition, but they’re not giving us the tools to do it,” says an advisor in Quebec with Toronto-based TD Wealth Private Investment Advice (TD Wealth PIA), which received the lowest rating in the fee-based support category, at 6.3. Advisors complained about deficiencies in both the technology and the hands-on guidance the firm offers.
TD Wealth PIA is working to improve its support in this area, says Dave Kelly, senior vice president with TD Wealth Private Wealth Management, noting that the firm recently expanded its team of practice-management support staff to provide advisors with hands-on guidance in the field. In addition, the firm is updating its portfolio-management software and plans to adopt a new “fee engine” this year, which will simplify the process of charging fees.
“The elegance of a fee-based model is really having one simple fee construct,” says Kelly. “The [new] fee engine is transformational in that it lets you move toward one fee-based model.”
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